Gasoline Prices Will Stay High

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Gasoline prices marked a dubious record this weekend: The national average price of regular unleaded has surpassed $5 per gallon for the first time. It stands at $5.01 today, while diesel averages $5.77. And this still is probably not the worst of it. Fuel demand is high, refineries can’t keep up with that demand, and crude oil remains very expensive, due in part to Western sanctions on Russian petroleum exports. Barring a recession, which would likely dent demand for gas and other fuels, we see the national average price peaking somewhere between $5.25 and $5.50 later this summer. It could go even higher if a hurricane hits the key refining sector based along the coast of the Gulf of Mexico. If a storm in the Gulf shuts down refineries for any amount of time this summer, look for gas prices to shoot past $6.

Oil prices seem locked into a high trading range, with benchmark West Texas Intermediate crude holding near $120 per barrel. Just before Russia invaded Ukraine this winter, WTI was trading closer to $95 per barrel. The loss of Russian barrels due to sanctions and voluntary decisions by energy companies not to import Russian oil have created a hefty price premium. And unfortunately, there is no end in sight to the war in Ukraine. We look for WTI to keep trading well above $100 per barrel for now. Again, the only force that could significantly lower them would be a recession, the specter of which is spooking financial markets.

Natural gas prices are also extremely elevated, with the benchmark gas futures contract recently trading at about $8.64 per million British thermal units. That’s almost triple the level from one year ago. Soaring gas prices are largely the result of strong demand for electricity in the U.S., since gas is the leading fuel for power generation, plus a surge in demand for liquefied gas in Europe. European governments are scrambling to find alternatives to Russian gas imported by pipeline, which has led to record levels of U.S. LNG exports to Europe. As a result, power prices in the U.S. are rising sharply: Up 12% in May from a year earlier. And again, there is little relief in sight. Gas stockpiles are below normal for this time of year, due to heavy consumption, a trend that is unlikely to change any time soon. We look for gas prices to trade near $9 per MMBtu in coming weeks. As winter nears, gas prices above $10/MMBtu are a good bet.